Navin Fluorine International’s (NFIL) Q1FY23 revenues missed our estimate by 6%, while higher EBITDA margin (up 190pbs) on better product mix in HPP and specialty helped EBITDA to be in-line.

The company is now close to reaping the benefits of long-term contracts it signed, which will start reflecting in P&L from the next quarter with: i) HPP supply (to Honeywell) having started in Q2FY23, ii) commencement of MPP plant by end-Q2FY23, and iii) debottlenecking of cGMP plant by end-Q3FY23. These three projects should substantially help NFIL deliver strong profit growth in the next few successive quarters.

The company said it has fully protected margins by back-to-back contracting for supply of raw materials, and that these contracts have adequate provision for inflation pass-through. NFIL is currently working out capex for cGMP-4 and ref-gas plants. We have increased our EPS estimates by 2-4% over FY23E/FY24E factoring-in the better margins.

Strong revenue growth in specialty segment. Consolidated revenues rose 22% YoY to Rs4bn (dip 2.8% QoQ) driven by 32.3% growth in specialty to Rs1.8bn. Revenues from HPP (includes ref-gas and inorganic fluorides) improved 32.2% YoY to Rs1.5bn, but was disappointingly flattish QoQ due to seasonality (which implies inorganic fluoride revenues should have dropped). CMDO revenues are lumpy and fell 11.9% YoY and 33% QoQ to Rs590mn. Specialty revenues showed strong growth in the domestic market (up 17.5% QoQ) on better sales to pharma industry. HPP export revenues dipped 12.9% QoQ to Rs334mn implying falling overseas volumes for R-22.

EBITDA margin expanded 190bps QoQ. Gross margin improved 225bps QoQ to 54.1% due to higher sales of R-22 in the domestic market (highest-margin business), better product mix in specialty and inorganic fluoride. Total expenses fell 1.6% QoQ helping EBITDA grow 27.4% YoY / 5.2% QoQ to Rs991mn. Net profit growth was strong at 33% YoY to Rs745mn, but was down 0.9% QoQ on higher tax rate.

HPP plant commercialised; faster ramp-up expected. NFIL commercialised its HPP plant on 12th Jul’22 to produce an intermediate product for HFO, which will be supplied to innovator Honeywell. The plant was developed through two stages: first stage was beset with certain technical issues which have been resolved, and it was good to go in stage two. Company has tied-up for all critical raw materials, and the contract with Honeywell has provision for: 1) raw material inflation pass-through, and 2) adjusting spreads for inflation under other cost heads. NFIL continues to believe HPP will have equal or better margin than the company average, and expects peak utilisation by Q4FY23.

Other projects progressing well; another capex in HPP has been announced. 1) MPP-2 plant will start production in Q2FY23 with revenues of Rs2.6bn-2.8bn p.a.; 2) agrochemical intermediate plant to start production in Dec’22 with revenue of Rs1.6bn p.a.; 3) execution on the latest large contract will start in Dec’23, and it can add revenues of Rs6bn p.a.; 4) debottlenecking of cGMP-3 plant with capex of Rs750mn should be finished in Q3FY23; 5) capex of Rs800mn for new molecule (inorganic fluoride) plant in Surat has been announced.